Weathering the Storm

 
Asset Management, Companies and Industries, Investment Themes, The Economy April 14, 2020

Weathering the Storm

Despite the wild gyrations in the market this quarter, we found opportunities to harvest tax losses and make several changes in our client portfolios. We added an overweight position to Disney (tkr: DIS) following its disproportionate decline in early March. Although Disney will see disruption from the coronavirus outbreak due to cancellations of its cruises, park closures, and cancelled sporting events, the company has recently focused most of its efforts on over the top (OTT) streaming services. We think these offerings should benefit in the near term as more people are quarantined and consuming video content at home. When the outbreak is ultimately contained, we think Disney will be positioned well to rebound, as it offers premium content and experiences that people will likely continue to enjoy.

We also sold our position in UnitedHealth Group (tkr: UNH). The stock had held up relatively well, boosted in part by Joe Biden’s strength in the Democratic primary. Bernie Sanders’ “Medicare for All” plan would have been a huge negative for health insurance companies, but as Biden looks likely to be the nominee, UnitedHealth Group has benefitted. We took the relative outperformance as an opportunity to sell out of our position due to concerns about how COVID-19 might impact the company.

We bought GlaxoSmithKline PLC (tkr: GSK), giving us exposure to a large pharmaceutical company with a wide breadth of product offerings, emphasis on vaccines and a solid pipeline. While several other Big Pharma companies are spinning off their older-but-steady product portfolios, we think GlaxoSmithKline’s diversification reduces risk and provides more dependable results. The company is also contributing its expertise and technology in collaboration with numerous companies and organizations to help develop a vaccine for COVID-19.

In the technology sector, we sold our position in IBM (tkr: IBM), harvesting a tax loss, and added an underweight position in Apple (tkr: AAPL). We believe Apple will withstand the turbulent environment given its strong cash position, and that it should outperform in an ultimate recovery.

We sold our position in Travelers Companies (tkr: TRV) due to concerns over “social inflation.” This concept refers to the fact that there is greater willingness to sue insurers and higher expectations among juries about what insurance companies should pay. Furthermore, the company faces an increasingly challenging tort environment as the plaintiff’s bar is getting more sophisticated, clever and aggressive.

In the energy sector, we sold Schlumberger N.V. (tkr: SLB), an oilfield services provider that has been hurt by underutilized equipment and more recently by both oil pricing wars between Saudi Arabia and Russia and further worldwide reductions in demand due to COVID-19.

Alongside the ~20% rally in the market near the end of the quarter, we sold positions in Hexcel (tkr: HXL), United Technologies (tkr: UTX) and TJX Companies (tkr: TJX). We believe these companies are most vulnerable in a prolonged “lockdown” scenario, which we think is a real possibility at this point. Aerospace companies Hexcel and United Technologies will be hurt as lowered demand for flights in 2020 will suppress the backlog for commercial aerospace orders in the future. TJX Companies will be hurt significantly if stores remain closed for a prolonged period. Its online presence is currently small, and therefore store closures hurt the company disproportionately relative to other retailers.

 

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.

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